Scottish Mortgage Investment Trust PLC (LSE:SMT) has Donald Trump to thank for helping cut its shares' discount to net asset value but analysts at Stifel downgraded their rating as they see investment valuations becoming too stretched.
A year ago, the broker suggested that the tide may be turning for the investment company and other trusts managed by Baillie Gifford, with their growth-focused investment style coming back into favour.
This prediction turned out not to be wrong, with many of these portfolios showing strong NAV performance over the past year or so, with many of the trusts seeing their discounts narrow.
Scottish Mortgage has been "a good example" of this, with the price recovering from just below 650p at the start of November 2023 to 984p yesterday - and the discount narrowing from the high teens to under 10%.
SMT shares have been carried strongly higher since the US election and the discount has narrowed to around 8% as Stifel analysts noted "the herd" were rushing into this segment of the market.
"We are taking a contrarian view and following this strong re-rating we are more cautious on the prospects for the investment style as we head into 2025, and wonder if many of these growth company stories are now starting to be priced for a perfect environment.
"We may be too early to be cautious and often are, but we think it is wrong to go chasing share prices that have performed so strongly and hence we downgrade our recommendation to 'neutral' from 'positive'."
SMT had come in for some criticism over its high level of, and valuation of, unlisted investments (which account for 26% of net assets), and these have underperformed, with an 11.3% decline over six months to September, though a large part is due to the liquidation of Northvolt.
Some added uncertainty comes from activist investor Elliott Management, though its initial 5.04% stake has been reduced, but its current position and future actions remain unclear.
"It is possible Elliott has continued to sell shares in the market, or perhaps purchased further shares taking advantage of the discount in excess of 10% over the summer... It is also possible Elliott has done nothing and retained a 35 million share stake," the analysts said.
"However, assuming it has retained or increased its stake, we think it likely Elliott will continue to give the board clear views as to how shareholder value can be enhanced in the future and keep their 'feet to the fire'."
ScotMort has quickly used up the £1 billion of firepower it had launched in March, and the board is continuing to review options, including further buybacks, potential tender offers and other ways to accelerate unquoted asset sales
Portfolio rebalancing has included exits such as HelloFresh and Zalando, due to changing growth prospects, while new investments targeted emerging markets and the luxury goods sector, including Nu Holdings, a digital bank in Latin America, Hermes International and TSMC.
Shareholders have expressed differing views on capital allocation, Stifel noted, with some favouring increased buybacks and others advocating investment in long-term growth opportunities.
The broker noted long-term performance has been good, with five-year NAV total return of 94.9%, and while short-term recovery has been strong, three-year performance remains weak at -30.9%.